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published on 16 February 2023 | reading time approx. 3 minutes
Valuing real property according to the German Valuation Act (BewG) plays an important role in real estate transactions. Higher real property values most often lead to a higher tax burden and so it is in the interest of the taxpayer to ensure that a valuation is correct. For this, the legislator offers the taxpayer the opportunity to prove a lower fair market value. This is usually done based on a valuation report. However, the decision of the Berlin-Brandenburg Tax Court of 25/5/2022 (docket no. 3 K 3247/18) shows that such a valuation report can be refuted even after a longer period of time.
If a share transfer leads to the levy of real estate transfer tax, or if a real property must be revalued due to the current real property tax reform », or if a real property is valued for the purpose of inheritance tax, it is always necessary to carry out a valuation of the real property which will then serve as a basis for assessing payable tax according to the Valuation Act (BewG). The most important provision for valuation is Sec. 9 para. 1 BewG. According to that provision, valuation must generally be based on the so called fair value. For its determination, the legislator provides an array of valuation methods which serve in practice as standardised procedures for determining the market value.
The statutory valuation procedures do not sufficiently enough take into account the individual circumstances of the case. And there is a risk that the assessed value will be too high. The taxpayer has therefore the possibility to prove to the competent tax authority that the fair value of the real property is lower. The burden of presentation and of proof for this lies with the taxpayer! He may choose whether he produces evidence in the form of
The fact, however, that the taxpayer selected the alternative option is not binding on the tax authorities and courts and they may take other findings into consideration. In accordance with the principle of free evaluation of evidence, a purchase price achieved on the market may be used for valuation even if a valuation report has been presented. Where reference is made to differing pieces of evidence, the question arises, which one should prevail; the answer is often to the detriment of the valuation report, which can thus be repudiated.
According to the established case law of the tax courts, a market value appraisal - even if formally and methodologically correctly prepared - is always only a “mere estimate”. Rather, a valuation report should only be used as a basis for valuation if, overall, it can be regarded as reasonable and its result is convincing. The result is checked for reasonableness.
A purchase price achieved in the normal course of business again reflects the actual market value quite in line with Sec. 9 paras. 1 and 2 BewG. In practice, this fundamentally increases the probative value of a purchase price achieved in the near term compared to the valuation report. In this context, “near-term” is any price achieved in a transaction taking place one year before or after the valuation date.
Importantly, this one-year period is not a rigid period outside of which purchase prices achieved are disregarded. The most recent decision of the Berlin-Brandenburg Tax Court (docket no. 3 K 3247/18) from last year shows that even acquisitions taking place 18 months to 3 years (BFH II R 55/01 dated 02/07/2004) after the valuation date can undermine the probative value of a valuation report prepared particularly for this purpose.
Decisive is that the further away from the valuation date, the lower the indicative effect of a purchase price freely negotiated on that date. If, however, the factors that influence the value of the real properties have not changed significantly ever since that date and the value disclosed in the valuation report for the purchase price falls outside an arm’s length range, sufficient doubts may arise as to the accuracy of the valuation report. However, the cited decision of the Berlin-Brandenburg Tax Court should be viewed critically, as the concept of factors influencing the value referenced therein does not directly take into account the rapidly rising real estate prices. Rather, based on the facts presented, it should be understood as a decision passed in the individual case and for the purpose of correcting a previous decision.
Ultimately, it can be stated that a valuation report is still essentially fit and proper to evidence a lower fair value of a real property! However, it is important to always keep an eye on whether sales transactions have taken place close to the valuation date. If the real property to be valued is sold to a third party within one year before or after the valuation date, it should be reconsidered whether a valuation report only to prove a lower market value should indeed be prepared, especially with regard to the costs of such a report, as the near-term sales transaction will generally be considered to have the higher probative value.
Sales transactions taking place outside the one-year period can also be taken into account. However, the above-mentioned decisions are based on “unusual circumstances of the particular case”, which cannot be generalised. The decisions rather show that not every valuation report automatically guarantees that a specific market value will be determined for a real property and that courts leave their doors open for corrections. If the value stated in the valuation report is within an arm's length range close to the purchase price, the risk is lower. All in all, the fact that courts sometimes take into consideration real property sales taking place within a longer period before and after the valuation date opens up opportunities in defence counselling but also reveals risks that must not be ignored.
Andreas Summerer
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